Climate-related disclosure reporting is on the rise globally.
Regulatory intervention has helped to increase the quantity and quality of climate-related reporting in some jurisdictions. This trend is likely to continue as the European Parliament has recently voted to adopt the Corporate Sustainability Reporting Directive (CSRD).
Meanwhile, a mere one year on from the launch of the International Sustainability Standards Board (ISSB), its first two exposure drafts have received over 1,400 comment letters and are currently under review.
We take a look at the global trends in sustainability disclosure usage, and the recent developments in international standards.
TCFD adoption increasing
The Task Force on Climate-Related Financial Disclosures (TCFD) recently released its 2022 Status Report, marking five years since its recommendations were released. The uptake of TCFDs is increasing, including:
- 3,900 organisations have pledged support for the TCFDs (a 50% increase from the 2021 status report)
- Supporters represent 101 countries, covering nearly all sectors, and have a combined market capitalisation of US$26 trillion
- The average number of recommended disclosures being reported has grown from 1.4 in 2017 to 4.2 in 2021 out of 11 recommended disclosures.
Lessons from the UK
In December 2020, the UK’s Financial Conduct Authority (FCA) “introduced a climate-related disclosure rule for premium listed issuers as a first step to improving the quality and quantity of disclosures across the corporate sector”. In short, this required organisations to state whether they had made disclosures consistent with the TCFDs, their reasoning if not and the location of the disclosures (policy statement PS20/17).
Recently, in a bid to assess whether the policy has achieved its desired outcome to increase both the quality and quantity of disclosures, the FCA and the Financial Reporting Council (FRC) have completed a joint review of the first round of disclosures produced.
While the FCA and FRC have both published extensive reports and practical guidance resulting from the reviews, their findings noted:
- Regulatory intervention significantly increased the number of companies making disclosures consistent with the TCFD framework
- Climate-related disclosures improved in quality post-regulatory intervention
- 90% of organisations reviewed made a ‘recognisable statement’ in their Annual Financial Review (AFR)
- 80% of AFRs included a net zero statement, and
- 64% of documents reviewed had climate change as a principal risk, with another 19% declaring it an emerging risk.
ISSB standards in deliberation
The International Sustainability Standards Board (ISSB) met early in November to discuss the 1,400+ comment letters for its Exposure Drafts:
- IFRS S1, General requirements for disclosure of sustainability-related financial information, and
- IFRS S2, Climate-related disclosures.
The ISSB has also discussed the need for S1 and S2 to operate in conjunction with international sustainability-related standards. These could include the Sustainability Accounting Standards Board (SASB) and Climate Disclosure Standards Board (CDSB) – both now consolidated into the International Financial Reporting Standards (IFRS) Foundation, as well as jurisdictional standards like European Sustainability Reporting Standards (ESRS) and Global Reporting Initiative (GRI).
An update, one year on
COP27, held in Sharm El-Sheikh, Egypt, on 6-18 November 2022, has provided the IFRS Foundation with an opportunity to update the global community on its progress on commitments made at COP26 in Glasgow. Achievements included establishing the ISSB as “a truly global baseline of sustainability-related disclosures that meet the information needs of investors”.
At COP27, the ISSB announced:
- A Partnership Framework to support preparers, investors and other stakeholders in preparation for using the standards
- Engagement and cooperation with several jurisdictions to endorse the standards, or work towards the interoperability of the standards with local requirements
- Further alignment with the CDP, as it agrees to incorporate IFRS S2 into its platform.
While the standards are not yet final, progress appears to be occurring. The ISSB has said it will continue to analyse the recommendations received on S1, and further redeliberate on S2. The ISSB intends to issue final standards ‘as early as possible in 2023’.
European Parliament formally adopts the Corporate Sustainability Reporting Directive
On 10 November, the European Parliament announced it voted to adopt the Corporate Sustainability Reporting Directive (CSRD). This means all large European Union (EU) organisations will “need to disclose data on the impact of their activities on people and the planet and any sustainability risks they are exposed to”. Organisations outside of, but with substantial activity in the EU (defined as a turnover of €150 million in the EU), will also need to comply.
The introduction of the CSRD will mean organisations provide more detailed reporting, helping to fill the gaps experienced through the current requirements under the Non-Financial Reporting Directive (NFRD). The European Parliament also estimates the number of EU organisations required to report sustainability information will increase from 11,700 currently to nearly 50,000.
The proposal is expected to be officially adopted at the end of November 2022 and commence application as early as 2024.
Impacts on Australian organisations
In a recent speech at the Carbon Market Institute’s Australasian Emissions Reduction Summit, ASIC Deputy Chair Karen Chester said, “Tackling climate change (or decarbonisation) is the single biggest driver of global capital developments and allocation.” Net zero targets are estimated to impact 80 per cent of global GDP. Meanwhile, here in Australia, the Australian Council of Superannuation Investors (ACSI) estimates that $1.59 trillion of the ASX 200 market cap is subject to a net zero ambition.
These acknowledgements, along with the growing commitments from global legislators to enact robust sustainability reporting frameworks, further cements the likelihood that Australian regulators will follow suit sooner rather than later. While this is likely to impact a significant number of Australian organisations in time, those currently doing business overseas should be aware of the developing requirements as they will likely be required to report on sustainability activities in other jurisdictions. At the very least, in the EU from 2024, it now seems.
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